Directors’ Loan Accounts: Everything You Need To Know

Understanding Directors’ Loan Accounts (DLAs) and the legal implications that may affect you, including tax and what to do if your DLA is overdrawn.

What is a DLA?

A DLA is an account that stores all of your company’s financial reports in regard to the transactions between the company and its director/s.

To accurately report these transactions, funds awarded to the director/s from the company should be kept within the company’s books and labelled as a creditor, and funds from the director/s to the company should be labelled as a debtor.

What Transactions Should Be Recorded?

It’s important to note that it isn’t just business-related transactions with the director/s that need to be reported. This is especially applicable if the organisation is a “close” (run by five or fewer individuals – all of whom are classed as directors) or is a family-run business.

In either case, any funds considered “private” (sent to family, friends, or other partners/associates that aren’t business-related) will also need to be recorded.

Are There Implications Regarding an Overdrawn DLA?

As of 2006 (owing to the inception of the Companies Act), there are no legal ramifications of a DLA becoming overdrawn, however, prior shareholder approval must be granted before a loan that exceeds £10k can be obtained.

DLAs become overdrawn when more funds are outgoing than are incoming. It is also noteworthy that an overdrawn DLA cannot be resolved simply by borrowing money from someone connected to the director/s.

Overdrawn DLAs & Benefits in Kind

You may be wondering if a benefit in kind occurs when a Directors’ Loan Account becomes overdrawn. The answer is yes – but only if the loan exceeds the £10k mark and will be the cash equivalent of the amount of interest accrued at the official rate.

If the loan is under £10k, or the director/s are paying the recommended interest rate back, a benefit in kind will not arise.

Overdrawn DLAs & Tax

There are tax implications for DLAs that have been overdrawn for a period of nine months (or longer) after the company’s accounting period, in which a tax charge at the rate of 32.5% on the lower of the amount outstanding at the year-end and nine months after the year-end.

The company will still be expected to make these payments even if it is making a loss, and even if there isn’t any corporation tax due. This tax implication is temporary because it falls under the 455 Corporation Tax Act 2010 (s455 CTA 2010) and is repayable to the company by HMRC nine months after the end of the accounting period in which the loan was repaid.

Be mindful that although the tax effect is nil once the loan has been repaid, a time lag between the full repayment and the tax refund can be financially harmful to the business.

Accounting Disclosure Requirements

When it comes to accounting disclosure requirements, the Companies Act 2006 Section 413 states that details of any advances or credit given by the company to its director/s must be disclosed.

This includes the following information:

• The sum of the loan (the total amount)
• The expected interest rate (the total amount charged)
• The main condition and any funds repaid or written off
• Transaction with the director/s disclosure

FAQs

Can a DLA be written off?

Yes, a loan granted from the company to the director can be written off, but it must be formally waived, otherwise, the financial liability will still remain.

A DLA that is written off is treated under the Income Tax Act 2005 and is considered a deemed dividend. This means there are no legal requirements for the company to have available profits for distribution.

That being said, in most cases, HMRC will argue that DLA write-offs fall under ‘emoluments from an office or employment’ and therefore will seek to collect Class 1 NIC from the company.

The write-off will also need to be included in the director’s self-assessment tax return under ‘additional information’.

Final Thoughts

For SMEs and start-ups, understanding the rules and regulations around Directors’ Loan Accounts is imperative in order to navigate this area correctly and in keeping with your organisation’s financial health.

For advice and support regarding your business’s finances, including accounting, bookkeeping, VAT, payroll management, and much more, get in touch with us today for a free consultation.

Disclaimer: The information presented in this blog post is accurate to the best of our knowledge and based on the latest available information as of the date of posting, which is 12th October 2023. However, please note that information, laws, regulations, and circumstances can change over time. Therefore, we cannot guarantee the accuracy, completeness, or currency of the information provided. It is always recommended to verify any information independently and consult with relevant professionals or experts for specific advice or updates. The authors and publishers of this blog post shall not be held liable for any errors, omissions, or outdated information, or for any actions taken based on the information provided in this blog post. Readers are encouraged to use their discretion and exercise due diligence in evaluating the accuracy and reliability of the information before making any decisions or taking any actions based on it.